What kind of letter of credit is suitable for entrepot trade? Come and give me some advice!
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My company plans to develop entrepot trade business, and we have no prior experience in this area, so we are very confused about the choice of letter of credit. I heard that there are many types of letters of credit, and different business scenarios are suitable for different types. I want to ask everyone, what kind of letter of credit is generally applicable to entrepot trade? What factors need to be considered? I hope experienced friends can share their insights so that we can avoid detours and smoothly carry out our business.
Trade Expert Insights Answers
In entrepot trade, back-to-back letters of credit and transferable letters of credit are more commonly used.
A back-to-back letter of credit refers to a situation where, after the intermediary receives a letter of credit issued by a foreign importer, it requests the original advising bank or another bank to issue a new letter of credit with similar content to another beneficiary based on the original letter of credit. This is usually used when an intermediary resells goods to others, or when trade between two countries cannot be directly conducted and requires communication through a third party.
A transferable letter of credit is a letter of credit under which the beneficiary (the first beneficiary) can request the bank authorized to pay, assume deferred payment, accept or negotiate (collectively referred to as the "transferring bank"), or, if the letter of credit is freely negotiable, can request the transferring bank specifically authorized in the letter of credit to transfer the letter of credit in whole or in part to one or more beneficiaries (the second beneficiaries).
When choosing, factors such as the degree of trust between trading parties, the time of cargo delivery, and risk bearing should be considered. If the trust in the supplier is high, a transferable letter of credit is more convenient; if more flexible control over the transaction is needed, a back-to-back letter of credit is a good choice.
Revolving letters of credit can also be considered. If the goods in entrepot trade are supplied in fixed quantities at regular intervals, a revolving letter of credit can be used again within a certain period after the amount is restored, saving opening procedures and fees, which is suitable for long-term and stable entrepot trade business.
Standby letters of credit may also be useful in entrepot trade. This is a special type of letter of credit that allows the beneficiary to claim payment from the issuing bank if the applicant fails to fulfill their obligations, thereby protecting the rights and interests of both trading parties to some extent.
Sight letters of credit are also commonly used. Entrepôt trade emphasizes the efficiency of capital turnover. Sight letters of credit allow the beneficiary to receive payment immediately after submitting documents that comply with the terms of the letter of credit, accelerating capital recovery and meeting the frequent capital flow needs of entrepot trade.
Usance letters of credit are sometimes applicable in entrepot trade. If the trading parties agree on a payment term, a usance letter of credit can provide the importer with a certain payment grace period, which is beneficial for capital arrangements, but the exporter needs to consider the collection risk.
For entrepot trade, if the intermediary has insufficient funds, a pre-payment letter of credit can allow them to withdraw a portion of the funds in advance to purchase goods, which can alleviate financial pressure and promote the smooth development of trade.
Counter letters of credit are more suitable for entrepot trade when the parties have a mutual purchasing relationship. Two letters of credit are linked and conditional upon each other, which can ensure the balance of interests between both parties and promote fair trade.
In entrepot trade, if the exporter doubts the creditworthiness of the issuing bank, they can request a confirmed letter of credit. The confirming bank is responsible for the negotiation of the letter of credit, thereby reducing the risk of collection.
Irrevocable letters of credit are also a common choice for entrepot trade. Once issued, the issuing bank cannot unilaterally amend or revoke it without the consent of the beneficiary and relevant parties, which provides better protection for the beneficiary's rights and interests.